REVOLVING CREDIT CRUNCH ROLLS ON - THIS IS THE REAL SAVINGS RATE

Last night’s release of the government G-19 data shows a consumer continuing to delever at an orderly, but unrelenting pace. Aggregate card debt outstanding declined $8 billion in October to $888 billion, making this the 13th consecutive month in which credit has shrank. Peak to trough decline is now up to 9% ($87 Billion).

The crunch continues to have two drivers: consumers pulling back voluntarily and banks stripping credit away from the bottom third of the borrower profile (FICO <660). The rate of decline in October was 9.3%, right in line with the monthly average over the last several months. Some might take comfort in the fact that the rate was down modestly from September (10.5%) and August (10.6%), but we think it's too early to call any sort of emerging inflection in this trend.

The G-19 data is a lagging indicator, as October-end data is just becoming available some five weeks after the fact. It's important, however, as it confirms trends unequivocally. If we see this number flatten out and reverse course we'll know that consumers (and banks for that matter) are returning to business as usual. If the trend continues, we'll know the "new normal" is becoming more and more real.

The next chart shows the monthly rate of change (annualized) going back about 40 years. The takeaway is that there's never been a period of credit contraction this sustained. We are in new territory here.

Finally, you might wonder how the individual companies are faring amidst this downturn. The answer: not much better. Take a look at Capital One's managed consumer loan growth - it practically mirrors that of the industry, and in fact, of late, has been accelerating to the downside.

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12/08/09 03:39 PM EST

REMINDER: HOLIDAY PARTY TOMORROW NIGHT

Please join us Wednesday evening for a Holiday get together. See the invite below.

Please join the Research Edge Consumer Team for Holiday cocktails in Midtown on December 9th. It’s hard to believe another year has almost passed and as a result it’s time to celebrate! In appreciation of your support throughout the year, we look forward to seeing you at Bar 44 (located in the lobby of the Royalton Hotel, 44 West 44 Street b/t 5th and 6th). Please stop by at any time between 6:30-8:30pm. We will have an area reserved on the right side of entrance across from the lobby bar.

Research Edge Consumer Team,

Todd, Anna, Brian, Eric, and Howard

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12/08/09 02:08 PM EST

EMPLOYMENT – CAN YOU TRUST THE NUMBERS?

Last Friday, the Labor Department reported that employers in the U.S. cut the fewest jobs in November since the recession began, and the unemployment rate fell to 10% from 10.2%. Shockingly, payrolls fell by 11,000 as compared with the median forecast for a 125,000 decline (in a Bloomberg News survey of economists). How could so many “smart” Economists be that far off? Maybe they are right and we need to look into the source of the data!

The data reported by the government is not supported by other independent data sources that would have suggested a greater jobs loss than the consensus estimate.

First, the Conference Board reported some conflicting trends in November with those claiming jobs are “hard to get” hitting 49.8%, an all time high for the index (up from 49.4% in October). On the other hand, it also reported that the labor market outlook was slightly less pessimistic. The November survey said that those anticipating MORE jobs in the months ahead DECLINED to 15.2% percent from 16.8%, but those expecting fewer jobs decreased to 23.1% from 26.1%. As an aside, the proportion of consumers expecting an increase in their incomes decreased to 10.0% from 10.7%.

Second, according to the Monster Employment Index, the outlook on U.S. employment conditions WEAKENED in November. The Monster U.S. employment outlook index fell to 119 from 120 in October. The Monster index measures overall employee demand from online recruitment activity.

Third, the November ISM purchasing managers survey showedDETERIORATION in employment conditions. The November manufacturing survey saw the diffusion index drop to 50.8, down from 53.1 in October, which, in turn was up from 46.8 in September. A reading below 50.0 indicates outright jobs contraction.

It should also be noted that new claims for unemployment insurance have been declining over the past several months, but I don’t believe that that this data correlates perfectly to a turnaround in the employment picture. At best, we are seeing the beginning of a bottoming process, but the weakness in help-wanted advertising and other non-government data points confirm the downside pressures in hiring.

Is it true that people in Washington can make up the numbers? I thought they only did that in China! Is it true that the Bureau of Labor Statistics (BLS) has the ability to make the headline numbers look better than reality? Unfortunately, TRUST and WASHINGTON are two words that do not go together!

If this is at all true, it would help to explain why Federal Reserve Chairman Ben Bernanke said yesterday that the “U.S. economy faces formidable headwinds.” I would bet that the Chairman has inside information on the real numbers. I continue to be cautious on the CONSUMER going into 2010 and we are still short the XLY.

Howard Penney

Managing Director

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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Doing The Contango

“Takes two to tango two to tangoTwo to really get the feeling of romanceLet's do the tango do the tango do the dance of love.”

-Dean Martin

As we noted earlier this morning in our Morning Call with subscribers (if you don’t have access please let us know), two recent fundamental factors give us pause as it relates to the prices of oil. The first is the weakness of the Ruble over the last three days, and down 1.5% overnight. The Russian economy, absent perhaps Saudia Arabia, has the most leverage to the price of oil, so when her currency weakens it is worth noting as a potential leading indicator for the price of oil. The second is the continued weakness of the stock markets of the United Arab Emirates, while we understand there are non-oil issues at play here, core Middle Eastern stock markets were down another 5%+ overnight, which once again suggests there may be another culprit.

The futures markets also often give us signals about the future of the front month price of oil. One month ago the spread on January oil futures, from Janaury 2010 to January 2011, was ~$6.00. That spread has now widened to more than $9.00 in less than a month. In futures parlance, this is what the floor traders call, Doing The Contango. In instances where the futures curve is sloped upward, this is referred to as contango. It is a normal state given that there are carrying costs to store oil, or any commodity for a period of time, but when the futures curve exceeds the carrying costs, the market is sending a direct signal. In effect, the curve is signaling that in the short term, there is more than enough oil above ground, which is a bearish short term price signal.

We are also starting to see some posturing ahead of the 155th OPEC meeting in Angola on December 22nd. Saudia Arabia’s Oil Minister, Ali al-Naimi, said the following while speaking at a meeting of various Arab states:

“Everything is so good now, we don't have to think very hard….The market is stable right now, volatility is minimum and everybody is happy with the price. It is in the right range.”

The Saudis are either quite complacent at the moment, quite happy at the moment, or attempting to signal that they do not think there should be any change in production, which is perhaps in their best interest, but not the other participants. It is also interesting to note that five non-OPEC members have been invited to this meeting, including Mexico and Russia, who combine to produce close to 15% of the world’s oil.

We currently have no position in Oil, but do continue to have a bullish view in the TAIL, which is three years or less, based on supply and demand dynamics that favor a longer term tightening of supply. In the TRADE and TREND, less than three weeks and less than three months respectively, the data points outlined above give us pause as it relates to being bullish on price. In addition, as we’ve outlined in the chart below, we have started to see a marginal decoupling in the correlation between the U.S. dollar and oil, which has been the primary factor driving price this year.

While we aren’t ready to be short of oil, we do know that when oil is Doing The Contango, it is probably not the “dance of love” for the oil bulls.

Daryl G. JonesManaging Director

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12/08/09 12:40 PM EST

Risk Management Time: SP500 Levels, Refreshed...

A lot of people seem to be getting nervous about US Equity prices up here. They should be.

In the chart below we outline the critical lines whereby we are proactively managing risk. The most obvious is the YTD high line up at 1110. Mr. Macro Market has tested and tried that line, flashing multiple Outside Reversals, since it was first established on November the 17th. We have yet to see a confirmation (higher-highs) of immediate-term bullish price momentum.

On the contrary, what we are seeing now in global equity and commodity prices are a series of lower-highs (gold, oil, Russia, China, etc.).

The immediate term TRADE lines of support/resistance that should be watched very closely for the next few days are:

SPX = 1089 (dotted green line in the chart below)

VIX = 23.79

US Dollar Index = 75.31

As of 12PM EST today, only 1 of those 3 lines have been violated (US Dollar Index has made its move to the upside). If you see either (or both) of the other 2 lines violated, probability goes up that we see a more meaningful correction in the SP500 down to its intermediate term TREND line down at 1061.

While I was a net seller at the YTD highs, I am a better buyer now (covering shorts and finding new entry levels on longs). For now, I am giving the benefit doubt to the bullish side of the debate until at least 2 of the aforementioned 3 lines are eclipsed.

KM

Keith R. McCulloughChief Executive Officer

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12/08/09 11:02 AM EST

MCD – CONSENSUS IS STILL TOO BULLISH

MCD’s November same-store sales growth came in below street expectations across the board, which signals to me that the street continues to be too bullish. Relative to the ranges I outlined in my sales preview note last week, reported comparable sales trends in the U.S. and APMEA came in NEUTRAL with Europe posting a BAD number.

In Europe, comparable sales increased 2.5% in November. Relative to both the street and my expectations, Europe posted the biggest shortfall. Even adjusting for the calendar shift, 2-year average trends decelerated rather significantly on a sequential basis from October. MCD attributed the slowdown to continued weakness in Germany and more broadly, to the sluggish economy. Management has routinely stated that its business is not recession proof but recession resistant, and these reported November results, particularly in Europe, should convince investors that there is truth to that statement.

In the U.S., same-store sales declined 0.6%. Adjusting for the calendar shift, which hurt reported results in November but helped in October, same-store sales trends in November were about even with October on a 2-year average basis. Although I outlined this outcome as NEUTRAL relative to my expectations, these top-line trends which have declined from prior months are not good. MCD has now posted two consecutive months of comparable sales declines after having not reported a negative result since March 2008. And, MCD has not reported consecutive monthly declines since early 2003.

On its 3Q09 earnings call, MCD management stated that despite its expectation of flat to negative comps in October that it was still gaining market share. MCD’s continued softness in the U.S. points to share losses or a narrowing of the gap between MCD and its peers at the very least. As the first chart below shows, MCD has outperformed both Wendy’s and BKC since 3Q08. I would not be surprised to learn that BKC’s $1 double cheeseburger, which was launched nationally on October 19, is gaining share. BKC has underperformed its two biggest competitors in the most recent quarters, but I think the company will show signs of comparables sales recovery when it reports fiscal 2Q10 results.

In APMEA, same-store sales decline 1%. The company was lapping an extremely difficult +13.2% result from last year so although 2-year average trends slowed sequentially from October, MCD is still putting up strong numbers in this segment. Like YUM, MCD continues to experience weakened demand in China.

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